Syllabus for Fall 2013
Professor: Lloyd Levitin
Office: Acc. 301E
Office Phone: 310-740-6524
E-mail:
Lecture Class
Tue / 6:30 – 9:30 P.M. Room: JKP 210
Office Hours
Monday / 2:45 – 3:45 P.M.
Tuesday / 2:45 – 3:15 P.M.
Wednesday / 2:45 – 3:45 P.M.
Thursday / 5:15 – 5:45 P.M.
Teaching Assistant: / Ian Vishnevsky (email: )
COURSE OBJECTIVE
Understanding what determines the value of a firm and how to estimate that value is a prerequisite for making rational business decisions. Entire industries (investment banking, securities analysis, and consulting) have grown prosperous providing valuation skills to investors and managers. The objective of this course is to provide you with a competent foundation in various valuation approaches, with an emphasis on the “best practices.” We cover discounted cash flow models, market multiple models, as well as specialized models used for M&A transactions and LBOs. We focus on valuation of businesses at the divisional and corporate levels. The course emphasizes practical and “real world” applications of valuation methodologies.
LEARNING OBJECTIVES
By the end of the course, students should be able to:
· Perform a valuation for any public or private company whether for purchase or sale, investment of a minority interest, going public in an IPO, implementing a LBO, or a restructuring.
· See clearly how industry fundamentals and competitive forces directly impact financial results and, in the process, drive stock valuation.
· Assess whether a company is creating value for its shareholders.
· Pull apart the financial statements to get at the relevant information for valuing equities.
· To identify “red flags” that indicates manipulation of financial statements and/or an impending liquidity crisis.
· Evaluate the reports of business valuation experts and to be able to ask the “right” questions of these experts.
WHO SHOULD TAKE THE COURSE
The course is of interest to those contemplating careers in investment banking, security analysis, consulting, private equity, and corporate finance. And it will also help with personal investing.
PREREQUISITE KNOWLEDGE
This course assumes that the background knowledge of students include basic finance and accounting. Prerequisites are one from GSBA 521 or GSBA 521b or GSBA 548.
COURSE DESCRIPTION
This course focuses on the financial analysis and valuation of companies. The course is segmented into four major sections:
Section I. Fundamentals Principles of Valuation
In section one, we discuss the four basic valuation approaches: Discounted Cash Flow, Market Multiples, Adjusted Book Value and Current Market Value. Then we discuss the basic valuation concepts including the principles of value creation and their relevance to a range of business decisions including strategy, growth, the business portfolio, mergers and acquisitions, and capital structure.
Section II. Analyzing Historical Performance
The second section covers financial analysis using data from the annual report. Our primary goal is to build a true understanding of operating performance across business units and for the entire company. We examine how industry fundamentals and competitive forces directly impact financial results and look for “red flags” that indicate manipulation of financial statements and/or an impending liquidity crisis. We spend considerable time on this because these financial statements provide many clues to future performance, and a firm’s valuation depends on future earnings and cash flow. With this analysis we are ready for a step-by-step guide to valuing a company.
Section III. Guide For Valuing a Company
In the third section, we build an integrated valuation model using discounted cash flow. We discuss how to decide which DCF model to use of the many commonly found in practice, the fundamentals of forecasting cash flow, how to determine the appropriate forecast period, and various issues related to estimating terminal value. We derive the appropriate cost of capital, focusing on how to estimate the inputs. We then discuss an alternative to DCF valuation, market multiples, which employs valuation ratios of comparable companies to value a company. We conclude with how to value an acquisition, a LBO, and a company with multiple businesses.
Section IV. Special Topics
In the final section, we cover special topics, namely, valuation of private companies, early stage high growth companies, cross-border acquisitions and distressed companies. Finally, we discuss issues of when to apply control premiums and marketability discounts.
TEACHING METHODS
The course will be in the form of lectures, class discussions, practice problems, and a group valuation project.
ABOUT YOUR INSTRUCTOR
Lloyd Levitin is a Professor of Clinical Finance and Business Economics at Marshall. He was Executive Vice President and CFO of Pacific Enterprises from 1982-1995 (now Sempra Energy), and was actively involved in the firm’s diversification program which included numerous acquisitions. He testified as an expert on utility diversification to the Senate Finance Committee of the U.S. Congress and has been a consultant for JurEcon, Inc., a nationwide consulting and research firm for management and counsel. He has a MBA from Wharton and a JD from University of San Francisco. He practiced as a CPA after receiving his MBA, and as an attorney after receiving his JD.
VALUATION REQUIRES A SKILL SET THAT COMBINES BOTH ART AND SCIENCE
Various valuation models and formulae will be taught in this class. Learning how to plug numbers into models and formulae to produce a valuation answer is the easy part. The quality that separates winners from losers in the world of valuation is the ability to decide which information to use under the circumstances and what assumptions to make that become inputs to the models and formulae. In other words, one has to exercise good judgment to be a winner. This course will sharpen your skills in making these judgments.
The instructor will provide cases from his business career and his knowledge of valuation successes and failures of others to help students sharpen their ability to improve decision making. In the financial world, judgment is the quality that can make the difference between success and failure in one’s career.
REQUIRED COURSE MATERIALS
1. Textbook: “Investment Banking: Valuation, Leveraged Buyouts and Mergers and Acquisitions” second edition by Rosenbaum and Pearl, 2013, with workbook. John Wiley and Sons, Inc. ISBN# of this custom book is 9781118771174.
2. Instructor’s Valuation Notes to be posted to “Blackboard.” I have copywrited these notes.
3. Excel files of 5 models (both completed spreadsheets and templates) to be posted to “Blackboard.”
4. PowerPoint presentations to be posted to Blackgoard.
5. Financial calculator capable of performing discounted cash flows (please bring calculator to each class).
VALUATION WORKBOOK
The Workbook included with the text contains over 400 problem-solving exercises and multiple choice questions which provides an opportunity for you to explore your understanding of the strategies and techniques covered in the main text.
GROUP PROJECT (30% of your grade) – LinkedIn Corporate (NYSE: LNKD)
On August 2, 2013, the price for LinkedIn’s shares closed at $235.58. This closing price gave LinkedIn a market capitalization of $26 billion, 20 times its last twelve months revenue and 906 times its last twelve months earnings. Your assignment is to determine if the company could possibly be worth that much or whether hype has overtaken economic reality.
The purpose of this project is for you to apply what you have learned in class, including how to analyze the financial performance of a company, and how to value it applying the valuation techniques presented in the course. This case illustrates the challenges of valuing an early-stage high growth company when there is great uncertainty about its intrinsic value and when the current market price might reflect expectations that are hard to justify.
In addition, you will gain a deep understanding of the company that you have decided to do your project on and its industry. I do not care whether you conclude that the stock is overvalued, undervalued, or fairly valued. I will be grading your project based on the quality of your analysis, how well you support your assumptions and apply the valuation models, the judgment you exercise, and on the professionalism of your presentations. My goal is for you to create an analyst report that you are proud of and would be comfortable sharing with a potential employer.
The completed Valuation Report is to include six different sections as set forth on page 9. In order to encourage you to work on this assignment throughout the semester, and to obtain feedback on this assignment during the semester, you will be required to complete and turn in certain sections at specified dates during the semester. See page 8 of this syllabus for due dates. The entire project is worth 20% of your grade.
Allocated as follows:
Sections 3 and 4 due September 24 – 5% of your grade
Sections 5b and 5c due October 15 – 5% of your grade
Sections 5d due November 5 – 5% of your grade
Entire report due November 19 – 5% of your grade
20% Total
You are encouraged to use Capital IQ for this assignment. Students enrolled in this class will be given access to Capital IQ. A number of equity research reports on LinkedIn will be posted to Blackboard. Students are to organize themselves into groups of 4-8 students by September 3 and elect a team leader who in turn notifies the teaching assistant by September 3 of the names of group members. The team leader is responsible to equitably allocate the required work for a given module, and draw together each participant’s work to hand in when due. If you have problems finding a group, you must let the teaching assistant know by September 3, and he will assign you to groups already formed, and notify the welcoming group. Groups, once formed, cannot be changed without unanimous written consent of all members. Grades on each module will be posted to Blackboard. You have 2 weeks from the time of posting to inform the Instructor of any error in posting.
GRADING SUMMARY
Students will be graded on a point basis with 100 available points:
Assignments
/ Points / % of GradeTESTS Mid-Term / 30 / 30%
Final Exam / 35 / 35%
GROUP PROJECT
– Valuation of the LinkedIn Corporation
– Peer evaluation / 20
10 / 20%
10%
CLASS PARTICIPATION / 5 / 5%
TOTAL / 100 / 100%
Final grades represent how you perform in the class relative to other students. Your grade will not be based on a mandated target, but on your performance. Three items are considered when assigning final grades:
1. Your average weighted score as a percentage of the available points for all assignments (the points you receive divided by the number of points possible).
2. The overall average percentage score within the class.
3. Your ranking among all students in the class.
Mid-terms and Final Exam
The exams will be closed-book, closed-notes. The final exam is cumulative from the beginning of the course.
Laptops or any hand-held device with email capabilities cannot be used. You should bring a calculator to perform calculations.
If you are unable to take a midterm, the following rules apply:
(1) If you fail to inform me in writing before the midterm begins, you will receive a zero grade, even if you have a valid excuse. An exception will be made if you have a note from your doctor that you were unable to communicate your excuse.
(2) If you inform me in writing before the midterm begins, and you have an acceptable excuse, then at my discretion, either a make-up exam will be given, or the final exam will count 65% of your grade.
Peer Evaluation on Group Project (10%)
Group Projects provide a valuable learning experience – how to work effectively and efficiently in groups (a common practice in Corporate America), learning from others, and sharpening a student’s ability to communicate to others. However, human nature being what it is, some students are tempted to relax and let others carry their load. In order to provide an incentive for all students to make maximum contributions to the team project, students will be asked to grade each team member’s contributions on a 10-point scale.
This evaluation is to be submitted by email to the Instructor before the last day of classes. No form will be provided. Simply list each person on the team and your score for the student. Any team member who does not email his (her) evaluation of team members will be deemed to have given a 10-point score to each member of the team.
Class Participation (5%)
Attendance and participation are essential for success in this course. Students are expected to actively participate in the class discussions. Class meetings will involve discussions of the assigned readings and current events. Preparation for each class is essential.
In evaluating your class participation, I will consider the quality and frequency of your participation, with a clear emphasis on quality. Students are required to display their name cards in each class. I will have no other way to determine who is present and participating.
ACADEMIC INTEGRITY
USC seeks to maintain an optimal learning environment. General principles of academic honesty include the concept of respect for the intellectual property of others, the expectation that individual work will be submitted unless otherwise allowed by an instructor, and the obligations both to protect one’s own academic work from misuse by others as well as to avoid using another’s work as one’s own. All students are expected to understand and abide by these principles. SCampus, the Student Guidebook, (www.usc.edu/scampus or http://scampus.usc.edu) contains the University Student Conduct Code (see University Governance, Section 11.00), while the recommended sanctions are located in Appendix A.
Students will be referred to the Office of Student Judicial Affairs and Community Standards for further review, should there be any suspicion of academic dishonesty. The Review process can be found at: http://www.usc.edu/student-affairs/SJACS/ . Failure to adhere to the academic conduct standards set forth by these guidelines and our programs will not be tolerated by the USC Marshall community and can lead to dismissal.
STUDENT DISABILITY